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Treasury and Payments

Optimizing Liquidity During Times of Stress 

Treasurers  are working in a stress environment that is at once economic, operational and financial. Here we explore steps to help optimize liquidity now and in the long-term, looking at five core elements: visibility, access, cash flow forecasting, investments and pooling mechanics.


As treasury and payments professionals, we understand you are dealing with many aspects of the fallout triggered by the global pandemic, including, but not limited to:

In this article we set out a framework to work through these challenges in a systematic, step-by-step manner.

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Corporate treasurers look into their cash positions on prior day. However, in times of stress treasurers should establish real-time visibility into cash positions and establish adequate buffers to manage shortfalls. Incrementally ensure that you have access to bank accounts, reporting and the systems that report them.

As volatility stays in the system, review the exposure that this fluidity poses. Examine your foreign currency positions and how these correspond to your foreign currency exposure.

With the impact on global operations, treasurers should also consider mitigating the risk of late settlements and loss of revenue from a bank counterparty perspective. Do you know which of your counterparties can execute quickly on your behalf when needed?

It may also be beneficial to take stock of your banking relationships and look further down to partners that banks may use to serve their customers.

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1.      Ensure that visibility is current and will continue to be maintained with online tools and real-time reporting.

2.      Explore viability of existing multi-bank solutions such as a multi-bank sweep or report.

3.      Set up manual processes for multi-bank reporting in order to support contingency planning.

4.      Explore bank and account rationalization to enhance visibility.

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5.      Evaluate bank counterparty risk exposure, both direct and indirect.

6.      Automate and streamline processes to facilitate real-time visibility.

7.      Put in an automated and globally efficient liquidity structure.

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A global view on where the liquidity is held is clearly important. Equally important is to get liquidity it needs to be on a just-in-time basis.

Check that existing liquidity structures are available and connected to your key markets globally. This may lead to a liquidity structure that is global in nature supported by regional liquidity hubs.

Ensure that there is awareness of what can be accessed based on tax, regulations and cross-border rules. From an external funding perspective it could be beneficial to understand and identify availability of credit lines as a back stop measure
 

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1.      Identify and address additional funding needs.

2.      Identify existing automated capabilities to fund (e.g. just-in-time processes).

3.      Explore diversified funding and credit options with your bank.
 

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4.      Consider advanced treasury structures such as an in-house bank, in order to more effectively use internal funding and manage risk.

5.      Explore automated funding capabilities.

6.      Consider overlay structure to centralize multi-bank pools.

7.      Evaluate your liquidity structure for efficiency opportunities.

8.      Explore financing at local, regional and global levels as a contingency measure.

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Once visibility and access are fine-tuned, it can be a good time to sharpen your cash flow forecasting.

With all the existing variables and the new unknowns, you may want to revisit your assumptions and calculations. Connect with your local and regional teams across the business to try and improve frequency, data collection, analysis and forecast accuracy. You may also want to review reporting platforms and technology infrastructure to ensure the finance organization can respond quickly to changes in business conditions.

Lastly it may benefit companies to do some scenario planning on need and availability of liquidity, along with where it may be required based on forecasts.
 

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1.      Connect with regional and functional teams to try and improve forecast accuracy.

2.      Prioritize a list of suppliers and upcoming payments (such as payroll, tax or coupon payments) that may need to be prefunded or need to use financing. The latter may include revolver, supply-chain finance (SCF) and single-use accounts (SUA).
 

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3.      Explore working capital tools to manage terms, simplify processes and monetize payments where feasible, e.g. supply chain finance, card programs (p-cards, single use accounts) and dynamic discounts. This may help support counterparty health and help with vertical integration of the value chain in future situations.

4.      Work with banking partners to leverage tools to improve reconciliation and cash application rate.

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Strongly consider maintaining sufficient “ready-to-access” liquidity on the balance sheet of a reliable banking provider for urgent needs – in contrast to holding across money market funds (MMF) or term deposits (TDs), which tend to have locked down periods.

As rates are being cut across the globe and pricing sensitivities are reducing, there may be an increased desire to hold stable operational balances with a strong, stable banking partner.

Evaluate if your current investments and cash allocations still fit within your view of risk-yield-availability matrix. Locking up your cash in slightly high-yielding, long-term structures might not be the best choice at the moment.
 

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1.      Evaluate and gain visibility to current investments (e.g. evaluate durations, counterparty exposure).

2.      Revisit allocations to investments within counterparty limits.

3.      Evaluate your segregation of cash and revisit allocations.
 

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4.      Evaluate if additional measures like extraordinary board review, are needed to regarding investment policies that need to be modified.

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Liquidity optimization techniques can potentially reduce the negative impact on your bottom line and save costs. Consider leveraging our global platforms and banking technology together with your own systems, to upstream liquidity as much as possible with minimal disruption to underlying business and at no additional IT effort.

These solutions can also minimize manual workload for reconciliation, bringing operational efficiency and allowing available resources to be deployed for other treasury activities.
 

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1.      Work with your partners to understand their contingency planning in case transactions fail due to insufficient balance.

2.      Optimize your current liquidity solutions to ensure you improve internally available cash, reduce FX impacts and support your bottom-line.
 

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3.      Evaluate effectiveness of your overall cash management processes.

 


To learn more, please contact your J.P. Morgan Treasury Services representative.


Further considerations on managing liquidity 

  • Virtual reference notes (VRNs) and virtual accounts bring benefits of speed of reconciliation and faster access to cash from various sources without requiring significant change management.
  • Virtual accounts track subsidiary funding requirements and can pay On-Behalf-Of without needing to have large overdrafts split across subsidiaries, leveraging the real-time cash position of the physical account.
  • Notional pooling can operate as a currency management solution versus the FX swap market. Given the volatility and one-sided trades your spreads can wildly fluctuate in the market. Within a multi-currency notional pool you can have direct access to your currency positions without these concerns.

Continue reading on how you can leverage the benefits of cash management centralization through multi-currency pooling and other innovations.

Read More About Liquidity Optimization Strategies

Harnessing the Power of Digital to Manage Disruption

The scale of disruption triggered by the COVID-19 crisis – including curtailed physical movements and cash flow pressures – have together thrown the task of treasury into sharp relief. In this article, we look at how treasurers are leveraging digital capabilities to safeguard the core, sustain operational continuity and build for the future.

Read About Digital Treasury Innovations

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